§ 136.16     Postpetition Interest on Priority Claims before BAPCPA
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 136.16, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

Section 1322(a)(2) states that the Chapter 13 plan must “provide for the full payment, in deferred cash payments, of all claims entitled to priority under § 507.”1 Section 1322(a)(2) does not contain the “as of the effective date” language that Congress used in the Code when it intended that a claim holder would receive interest to preserve the present value of its allowed claim.2 In Chapter 13 cases filed before October 22, 1994, prepetition claims entitled to priority under § 507 must be paid in full under § 1322(a)(2), in deferred cash payments, but are not entitled to postpetition interest during the repayment period.3 In cases filed after October 22, 1994, with the possible exception of secured debts for alimony, maintenance or support,4 the prepetition claims that are entitled to priority under § 507 are unsecured claims that are not entitled to postpetition interest.5

[2]

Chapter 13 is an especially attractive way for a consumer debtor to manage tax claims and other priority claims because the postpetition interest that would be payable outside bankruptcy or in a Chapter 11 case6 is not required by § 1322(a)(2). The Chapter 13 debtor can defer the payment of taxes and other priority claims by installments through the plan and retire even large prepetition liabilities over the years of the plan without interest.

[3]

An unsecured, priority claim holder is entitled to postpetition interest in a Chapter 13 case only if all unsecured claim holders are entitled to interest. For example, if in a hypothetical liquidation under the best-interests-of-creditors test in § 1325(a)(4),7 unsecured claim holders would be paid in full, then priority claimants would be entitled to postpetition interest on deferred payments through the Chapter 13 plan.8

[4]

Chapter 13 debtors sometimes volunteer to pay postpetition interest to priority claim holders through Chapter 13 plans. For example, when there is a nonfiling codebtor from whom the postpetition interest would be collectible, the debtor might propose payment of postpetition interest through the plan to protect the codebtor.9 Paying postpetition interest through the confirmed plan is a hedge against dismissal or conversion to Chapter 7. At conversion, postpetition interest that accumulated but was not paid during the Chapter 13 case with respect to claims that are nondischargeable in the Chapter 7 case becomes the nondischargeable personal obligation of the debtor.10 Even if the debtor completes the Chapter 13 plan and receives a full payment discharge, postpetition interest that accumulated on a nondischargeable priority claim for alimony, maintenance or support survives as a personal obligation of the debtor.11

[5]

The Chapter 13 trustee and other creditors may object to the payment of postpetition interest to priority claim holders through the plan. Postpetition interest is not allowable as a component of the priority claim under § 502(b)(2). Every dollar of postpetition interest paid to a priority claim holder typically is a dollar less available to other unsecured creditors through the plan.

[6]

That Chapter 13 debtors need not pay postpetition interest to most priority claim holders is a significant incentive for priority creditors to assert secured claims in the Chapter 13 case.12 An allowed secured claim under § 506(a) will be entitled to “present value” (interest) if the claim is paid in deferred payments through the plan under § 1325(a)(5).13

[7]

The narrow class of priority claims that may also be secured claims will probably be entitled to present value (interest) at confirmation. As detailed elsewhere,14 the Bankruptcy Reform Act of 1994 amended § 507(a)(7) to create a new seventh priority for “allowed claims for debts to a spouse, former spouse, or child of the debtor, for alimony to, maintenance for or support of such spouse or child.”15 Unlike the other classes of prepetition claims entitled to priority under § 507(a), the new seventh priority is not limited to unsecured claims but applies to all “allowed claims” that fit the description in § 507(a)(7).

[8]

In Chapter 13 cases filed after October 22, 1994, there will be claims for alimony, maintenance or support that are entitled to priority under § 507(a)(7) and to full payment under § 1322(a)(2), that are also secured claims entitled to present value at confirmation under § 1325(a)(5). Any conflict between the no-interest provisions of § 1322(a)(2) and the present value provisions of § 1325(a)(5) will probably be resolved by the courts in favor of the payment of interest. Section 1322(a)(2) does not prohibit the payment of interest to priority claim holders, it just omits to require such interest; § 1325(a)(5) mandates present value treatment (interest) to secured claim holders retaining liens and receiving payments through the plan.

[9]

The only priority listed in § 507(a) that arises after the petition is administrative expenses described in § 503(b) that are entitled to first priority under § 507(a)(1). Included in this category might be postpetition rent;16 wages, salaries or commissions for services rendered after commencement of the case that are actual, necessary costs of preserving the estate;17 postpetition utilities (under some circumstances);18 and trade credit incurred after the petition by a debtor engaged in business.19 Most plans treat administrative expenses as priority claims entitled to full payment (without interest) under § 1322(a)(2) notwithstanding the absence of a clear reference to administrative expenses in § 1322(a)(2).20

[10]

There is a narrow subclass of postpetition debt that can satisfy the definition of an administrative expense under § 503(b) that is also secured. For example, a postpetition operating loan to a debtor engaged in business that is secured by the estate’s inventory could be a secured administrative expense. A postpetition loan secured by a lien on the debtor’s residence used to repair the roof and thus preserve property of the estate might be an administrative expense under § 503(b)(1)(A), entitled to priority under § 507(a)(1), and also a secured debt. A postpetition tax “incurred by the estate” that is secured by a lien on property of the estate—for example, a postpetition ad valorem property tax secured by a statutory lien on estate property21—wears both hats.

[11]

An administrative expense secured by a lien might have multiple entitlements: priority status and full payment (without interest) under § 1322(a)(2); a right to postpetition interest by contract or nonbankruptcy law that is not precluded by § 503(b) or § 507(a)(1) but that is inconsistent with treatment under § 1322(a)(2).

[12]

Postpetition debts that meet the definition of administrative expenses in § 503(b)(1) sometimes also qualify as postpetition claims under § 1305.22 The holder of a postpetition claim can control whether the claim will be managed through the Chapter 13 plan by filing or not filing a proof of claim.23 The plan might provide for the payment of postpetition claims in full with interest as an incentive to the filing of § 1305 claims.24 A proof of claim filed under § 1305 will not be allowable (over objection) to the extent it includes postpetition interest because § 1305(b) incorporates most of § 502 to determine the allowance of a postpetition claim,25 and 11 U.S.C. § 502(b)(2) disallows “unmatured interest.”

[13]

But postpetition claim holders under § 1305 can usually extract interest in return for an agreement to file a proof of claim and participate in the plan. For example, though a taxing authority is not entitled to postpetition interest on an unsecured postpetition tax claim characterized as an administrative expense,26 if the claim is recharacterized as a postpetition claim under § 1305, the taxing authority can leverage the debtor to pay postpetition interest by declining to file a proof of claim. If the postpetition claim holder does not file a § 1305 claim, the claim is not dischargeable under § 1328,27 and any contract or statutory right to interest is collectible from the debtor after the Chapter 13 case (or after the grant of relief from the stay).

[14]

It is possible that a debt accruing after the petition will fit the definition of an administrative expense under § 503, will be secured by a lien or security interest and will fit the definition of a postpetition claim under § 1305. A postpetition ad valorem property tax debt might fit all three categories. Arguably, such a debt would be entitled to payment in full as a priority claim and to postpetition interest because the claim is secured. The holder of the claim might refuse to participate in the Chapter 13 case altogether, to preserve the right to collect the postpetition debt with interest when the case is over. The risk in any strategic decision not to file a request for payment of an administrative expense under § 503(a) or a proof of the postpetition claim under § 1305 is that a court will later determine that the debt was really just an ordinary priority claim entitled to full payment under § 1322(a)(2) but subject to discharge without payment upon completion of payments under the plan because no allowable claim was filed.28


 

1  11 U.S.C. § 1322(a)(2). See § 136.17  Postpetition Interest on Priority Claims after BAPCPA for changes effected by BAPCPA.

 

2  See, e.g., 11 U.S.C. § 1325(a)(5)(B)(ii): “the value as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim.”

 

3  See discussion of providing for priority claims beginning at § 73.1  Plan Must Provide Full Payment. See, e.g., In re Hageman, 108 B.R. 1016 (Bankr. N.D. Iowa 1989); In re Kingsley, 86 B.R. 17 (Bankr. D. Conn. 1988); In re Ridgley, 81 B.R. 65 (Bankr. D. Or. 1987); In re Young, 61 B.R. 150 (Bankr. S.D. Ind. 1986); In re Healis, 49 B.R. 939 (Bankr. M.D. Pa. 1985); In re Spencer, 45 B.R. 1 (Bankr. W.D. Mo. 1983); In re Christian, 25 B.R. 438 (Bankr. D.N.M. 1982).

 

4  See 11 U.S.C. § 507(a)(7), discussed below in this section and in § 73.7  Secured Priority Claims?, § 136.18  Secured Priority Claims before BAPCPA and § 136.19  Secured Priority Claims after BAPCPA. The Bankruptcy Reform Act of 1994 created the possibility of a secured prepetition priority claim by amending § 507(a)(7) to grant a seventh priority to “allowed claims for debts to a spouse, former spouse or child of the debtor, for alimony to, maintenance for, or support of such spouse or child.” 11 U.S.C. § 507(a)(7), as amended by Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 304, 108 Stat. 4106 (1994). Secured priority claims under § 507(a)(7) will be relatively rare but are an exception to the general rule that priority claims are not entitled to postpetition interest in a Chapter 13 case.

 

5  See § 73.5  Interest Not Required, with Exceptions, § 73.7  Secured Priority Claims?§ 76.6  Valuation after Rash§ 136.18  Secured Priority Claims before BAPCPA and § 136.19  Secured Priority Claims after BAPCPA. See, e.g., In re Messinger, 241 B.R. 697, 701 (Bankr. D. Idaho 1999) (“Child support obligations are priority debts under § 507(a)(7). A chapter 13 plan, by virtue of § 1322(a)(2), must ‘provide for the full payment . . . .’ ‘Full payment’ however, does not require payment of the claim with post-petition interest. . . . When Congress intends that a claim be paid with such interest, it states that the creditor will receive ‘value, as of the effective date of the plan, equal to the allowed amount of such claim.’ . . . No similar language is used in § 1322(a)(2) in regard to child support or other priority debt in chapter 13. . . . Accordingly, although Ms. Hargrave’s claim is given priority status and she must be paid in full under § 1322(a)(2), she is not entitled to insist on payment of postpetition interest through the plan on the debt owed to her.”); In re Pitt, 240 B.R. 908 (Bankr. N.D. Cal. 1999) (Priority, nondischargeable support debts are entitled to full payment through the plan without postpetition interest under § 1322(a)(2). Priority, dischargeable tax debts are also paid in full through the plan under § 1322(a)(2) without interest.); Holway v. United States (In re Holway), 237 B.R. 217, 219 (Bankr. M.D. Fla. 1999) (Debtor did not have to pay interest on priority tax claims during Chapter 13 case. But at conversion to Chapter 7 before discharge, unpaid postpetition interest remains the debtor’s personal liability.); In re Dorf, 219 B.R. 498, 501 n.3 (Bankr. N.D. Ill. 1998) (Prepetition support arrearage that is nondischargeable, entitled to priority claim and entitled to full payment under § 1322(a)(1) is not entitled to postpetition interest. In a note, “Nina Dorf is not entitled to interest on her claim. ‘Full payment’ of a claim under § 1322(a)(1) does not include post-petition interest. . . . Where the Bankruptcy Code provides interest, the language of the particular code section expressly allows the creditor to receive its claim at its ‘value as of the effective date of the plan.’ . . . As § 1322(a)(1) does not include such language, it does not include interest on the claim of an unsecured priority holder.”).

 

6  11 U.S.C. § 1129(a)(9) contains the “effective date of the plan” language that requires Chapter 11 debtors, in the absence of agreement otherwise, to pay priority claimants present value interest on deferred payments.

 

7  See discussion beginning at § 90.1  In General: Plan Payments vs. Hypothetical Liquidation.

 

8  See § 162.2 [ Discount Rates and Interest If Liquidation Would Produce Dividend ] § 90.5  Discount Rates and Interest If Liquidation Would Produce Dividend. See, e.g., In re Smith, 196 B.R. 565, 569, 571 (Bankr. M.D. Fla. 1996) (Tax claim is paid in full without interest in a Chapter 13 case that satisfies § 1325(a)(4) without the payment of interest. “[Section] 1322(a)(2) does not require the payment of interest.” The absence of “value, as of the effective date of the plan,” indicates that payment of priority claims in full without interest satisfies § 1322(a)(2).); In re Hageman, 108 B.R. 1016 (Bankr. N.D. Iowa 1989) (In the absence of evidence that the IRS would have received a distribution in a Chapter 7 case, § 1325(a)(4) is satisfied and the IRS is not entitled to interest on its priority claim.); In re Hieb, 88 B.R. 1019 (Bankr. D.S.D. 1988) (IRS is not entitled to interest on its priority claim unless it and other unsecured claim holders would be entitled to present value payments under the best-interests-of-creditors test in § 1325(a)(4).).

 

9  See §§ 88.1 [ Plan Does Not Pay Debt in Full ] § 67.2  Plan Does Not Pay Debt in Full, 89.1 [ Postpetition Interest, Attorneys’ Fees, Costs and Other Charges ] § 67.3  Postpetition Interest, Attorneys’ Fees, Costs and Other Charges and 150.1 [ Co-signed Debts ] § 87.3  Co-signed Debts.

 

10  See, e.g., Holway v. United States (In re Holway), 237 B.R. 217, 219 (Bankr. M.D. Fla. 1999) (Although debtor did not have to pay interest on priority tax claims during Chapter 13 case, upon conversion to Chapter 7, postpetition interest and penalties become payable notwithstanding payment in full of priority claim prior to conversion. “Under Chapter 13 of the Bankruptcy Code, a debtor is afforded a unique opportunity to pay the IRS only a portion of its claim in full. . . . [B]ecause the ‘deferred cash payments’ do not bear interest, . . . the debtor who successfully completes their Chapter 13 plan enjoys this unique ability to pay their tax liability without the penalties and interest normally associated with tax debt. . . . In this case, the Debtor paid the priority tax debt, in full, under a confirmed Chapter 13 plan. The Debtor, however, did not complete the plan payments, and did not receive a Chapter 13 discharge. Instead, the Debtor converted the case and received a Chapter 7 discharge. . . . [A]ny unpaid tax debt in question in this case would not be discharged. . . . [I]f the underlying tax is nondischargeable, the penalties and interest on that tax are nondischargeable, including postpetition interest.”).

 

11  See § 136.20  Alimony, Maintenance and Support in Cases Filed after October 22, 1994§ 136.21  Domestic Support Obligations after BAPCPA§ 158.1  Alimony, Maintenance or Support and § 159.5  Domestic Support Obligations: § 523(a)(5).   See, e.g., In re Messinger, 241 B.R. 697 (Bankr. D. Idaho 1999) (Accruing but unpaid postpetition interest on support judgment is nondischargeable at the completion of payments under the plan.); In re Pitt, 240 B.R. 908 (Bankr. N.D. Cal. 1999) (Citing § 502 and Bruning v. United States, 376 U.S. 358, 84 S. Ct. 906, 11 L. Ed. 2d 772 (1964), postpetition interest on priority support debts is not allowable during the plan, but that interest accrues and is nondischargeable at the completion of payments under the plan.).

 

12  See § 73.7  Secured Priority Claims?, § 136.18  Secured Priority Claims before BAPCPA and § 136.19  Secured Priority Claims after BAPCPA.

 

13  See §§ 111.1 [ “Value, As of the Effective Date of the Plan” Means Interest ] § 77.1  “Value, As of the Effective Date of the Plan” Means Interest and 112.1 [ Interest Rate Anarchy: Present Value Before Till ] § 77.2  Interest Rate Anarchy: Present Value before Till.

 

14  See above in this section, and see § 73.2  What Claims Are Priority Claims?, § 73.3  Priority Claims Added or Changed by BAPCPA, § 73.7  Secured Priority Claims?, § 136.18  Secured Priority Claims before BAPCPA,  § 136.19  Secured Priority Claims after BAPCPA§ 136.20  Alimony, Maintenance and Support in Cases Filed after October 22, 1994, § 158.1  Alimony, Maintenance or Support and § 159.5  Domestic Support Obligations: § 523(a)(5).

 

15  11 U.S.C. § 507(a)(7), as amended by Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 304, 108 Stat. 4106 (1994).

 

16  See § 136.10  Leases and Executory Contracts before BAPCPA and § 136.11  Leases and Executory Contracts after BAPCPA.

 

17  11 U.S.C. § 503(b)(1)(A). See § 136.14  Miscellaneous Administrative Expenses and Priority Claims before BAPCPA and § 136.15  Miscellaneous Administrative Expenses and Priority Claims after BAPCPA.

 

18  See § 136.8  Utilities before BAPCPA and § 136.9  Utilities after BAPCPA.

 

19  See § 136.14  Miscellaneous Administrative Expenses and Priority Claims before BAPCPA and § 136.15  Miscellaneous Administrative Expenses and Priority Claims after BAPCPA.

 

20  See § 73.2  What Claims Are Priority Claims?§ 73.3  Priority Claims Added or Changed by BAPCPA and discussion beginning at § 136.1  Treatment of Priority Claims.

 

21  See 11 U.S.C. § 362(b)(18), which excepts from the automatic stay the creation or perfection of a postpetition lien for ad valorem real property taxes.

 

22  See § 137.1  Postpetition Claims before BAPCPA and § 137.2  Postpetition Claims after BAPCPA.

 

23  See § 113.6  Providing for Postpetition Claims, § 113.7  Order of Payments to Creditors before BAPCPA, § 132.9  Postpetition Claims, § 137.1  Postpetition Claims before BAPCPA§ 137.2  Postpetition Claims after BAPCPA, § 158.6  Postpetition Claims§ 159.1  Taxes and § 159.9  Chapter 7 Trustee Compensation: § 1326(d).

 

24  See § 89.8  Postpetition Claims, § 113.6  Providing for Postpetition Claims, § 113.7  Order of Payments to Creditors before BAPCPA, § 114.5  To Provide for Postpetition Creditors, § 127.4  To Provide for Postpetition Claims and § 132.9  Postpetition Claims.

 

25  See § 137.1  Postpetition Claims before BAPCPA and § 137.2  Postpetition Claims after BAPCPA.

 

26  See In re Kingsley, 86 B.R. 17 (Bankr. D. Conn. 1988) (Taxing authority is not entitled to postpetition interest on unsecured tax claim that accrues after filing and before confirmation of Chapter 13 plan, notwithstanding that postpetition tax claim is entitled to administrative expense priority.).

 

27  See § 137.1  Postpetition Claims before BAPCPA§ 137.2  Postpetition Claims after BAPCPA, § 158.6  Postpetition Claims§ 159.1  Taxes and § 159.9  Chapter 7 Trustee Compensation: § 1326(d). 

 

28  See § 132.6  Priority Claims, Including Requests for Payment of Administrative Expenses, § 132.9  Postpetition Claims, § 135.5  Failure to File Proof of Claim, § 137.1  Postpetition Claims before BAPCPA, § 137.2  Postpetition Claims after BAPCPA, § 157.1  Broadest Discharge Available, § 157.2  BAPCPA Shrank the Discharge§ 157.3  Completion of Payments after BAPCPA, § 158.6  Postpetition Claims§ 159.1  Taxes§ 159.9  Chapter 7 Trustee Compensation: § 1326(d) and § 162.5  On Administrative Expenses.